Learn a Lesson From Luckin Coffee — and Avoid It in the ProcessDecember 19, 2020
You may remember Luckin Coffee (OTCMKTS:LKNCY) as the ticker symbol LK. That’s no longer the case. After revelations this past year, Luckin Coffee stock was relegated to the over-the-counter market.
Source: NewsToday / Shutterstock.com
This was once a promising growth stock, but it led investors astray when top management was dishonest about sales, among other things. While the company looked like it was about to go from modest coffeehouse to perennial powerhouse, Luckin just couldn’t resist cooking the books.
So, rather than burning its coffee, the company burned its investors. And while it was a great growth story then and showed plenty of promise, it was also a dishonest representation of the opportunity investors are seeing in China.
My point? Let Luckin Coffee stock serve as your reminder to do your due diligence.
Luckin Coffee Stock in a Nutshell
Before it got caught, there was writing on the wall for Luckin Coffee stock. Specifically, Muddy Waters had published research about its questionable accounting practices. That work was published on Jan. 31.
The report came just a few weeks after Luckin hit an all-time high and the news sent a jolt of volatility into the share price. Shares fell as much as 27% in a single day. However, Luckin was able to recover some of those losses, ending lower by “just” 10.7% on the day.
Then on Feb. 3, the company denied the report, buying investors some time to assess the news.
However, the truth always catches up. On Apr. 2, shares plunged as low as 81% after the company said it had accounting irregularities regarding its revenue. Days later, it was halted for more than a month.
The worst part about all of this? Not only did the company defraud investors, but it hadn’t even been public for a year at that point. It’s stint on the public market was impressive and had bulls looking for a long-term home run. Instead, they were beaned in the batter’s box and rather than trotting to first, they were ruled out.
What can we take out of this?
Well, I’d love to sit here and say every investor should do their forensic due diligence. However, the reality is that many won’t because it’s too hard or takes up too much time. Heck, look at how many pros missed this one.
But where there’s smoke, there’s fire. Bulls had a few months to bail out on Luckin once the reports were published. Many didn’t. So, while not every published short report equates to fraud, I’m suggesting we look at even our favorite stocks with an open mind.
Click to EnlargeSource: Chart courtesy of StockCharts.com
Now traded on OTCMKTS, shares in Luckin Coffee stock were up 79% as of Dec. 16 from the August low. Then on Dec. 17, shares rocketed higher by almost 100% on the day. Today, the stock is even higher at $10.24. So, is that a sign to jump in?
No — it’s time to move on. Whether you were burned by this name or not, investors should part ways with the coffee company.
Why? Because once a stock is relegated to the pink sheets, there’s a very good reason that it’s there. So, while Luckin may further recover, it’s too tainted to buy. Don’t get sucked into a low-liquidity over-the-counter asset by trying to catch this falling knife.
Instead, just take Luckin as a lesson learned to do better due diligence, no matter how bullish or bearish the market is on a particular security.
Moreover, there’s something else to keep in mind with this stock. The news with Luckin dealt a blow to the reputation of Chinese stocks and that’s not fair. Luckin was the first Chinese stock with accounting issues and it won’t be the last. But as investors, we can’t paint the entire group of Chinese stocks with the same brush.
So, while the Luckin situation reminds us to be wary, it also doesn’t discredit the many Chinese businesses that are absolutely crushing it. Remember, China has a population of 1.4 billion. Its economic growth also outpaces most of the developed world, while its middle class is larger than the entire U.S. population.
There is opportunity in China. Just no longer with Luckin Coffee stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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